THE WAR IN UKRAINE IS A PROVING GROUND FOR US DEMOCRACY

Following the US elections, the Ukrainians we met during a recent visit to Kyiv are waiting with a mix of dread and cautious optimism for Donald Trump’s first actions as president, presumably to make good on his pledge to halt the war. As a US organization committed to counteracting corruption and global authoritarianism, we recognize the great debt owed to Ukraine by America and its allies. Simply put, Ukraine has spent more than a decade fighting an expansionist Russian autocracy for their independence and territorial integrity, which the US, UK and Russia committed to defend under the terms of the 1994 Budapest Memorandum. Following our latest visit to Kyiv, we believe one of several critical missions for Americans who support democracy at home and abroad is to ensure that the US sanctions regime on Russia, however flawed it may be, remains in place. That is why we are working with allies in Albany to develop a proposal for New York State to take advantage of its role as jurisdiction of choice for foreign and domestic banks to ensure that our financial system is protected from thousands of entities that not only support Vladimir Putin’s imperial project but also engage in money laundering and interference in our politics.

We believe America’s approach to Ukraine is a bellwether for its democracy. As previously reported in this newsletter, support for that country in its struggle with Russia is a rare example of bipartisan agreement in current US politics. Polling this summer showed nearly two thirds of respondents, including most Republicans, back Ukraine. And a significant 48% (including 37% of Republicans) agreed with the statement that the US should support Ukraine open-endedly. And while even most educated Americans may not know what the Budapest Memorandum is and what it has committed us to, its terms still oblige us and the UK (and Russia too, of course) to guarantee Ukraine’s territorial integrity and inviolability of its borders. Unless we do so, Ukraine’s agreement in 1994 to give up its Soviet-era nuclear arsenal in exchange for treaty-bound commitments to its protection looks like a profound mistake and undermines contemporary non-proliferation efforts around the world.

Of course, Russia’s so-called hybrid invasion of Crimea and the Donbas region in 2014, and full-scale invasion of the rest of Ukraine in 2022, demonstrated its stark unwillingness to abide by its own commitments. It has further refused to abide by the terms of the Minsk agreements, the series of negotiations launched after Russia’s illegal annexation of Ukrainian territory from 2014. Since the beginning of the current, full-scale war, it has built a coalition with Iran, North Korea and China (amid fervent denials by that country that it is supplying arms) to carry out a murderous war of aggression on a scale not seen in Europe since 1945. While the current administration has slow-rolled delivery of promised aid, which is problem enough, our civil society partners in Ukraine rightly worry that the Trump White House may listen to many GOP members – including Senator (and Vice President-elect) J.D. Vance — who vocally oppose aid.

What will Trump do?

In our meetings in Kyiv, a common line from our Ukrainian colleagues was that they pinned their hopes on Trump’s sheer unpredictability and on this factor undermining Russian plans that appear to count on his acquiescence to Kremlin objectives. Much is made in the US of Trump’s relationship with Putin and his apparent admiration for the Russian autocrat, but it’s important to recognize that his previous administration differed little in actual Russia policy from the previous two. In a Brookings Institution commentary in December 2019, Alina Polyakova and Filippos Letsas listed 52 policy actions on Russia to date by the Trump administration. Notably most were negative statements about Russia regarding specific actions taken in Ukraine and Syria and more than a dozen were sanctions designations. The overall impression of this list is that the administration was reactive, but, in terms of specific actions, it is hard to tell the line between it and the Obama administration and its ill-fated ‘reset’ attempt.   And for Ukrainian observers, that is not praise.

Still, like our Ukrainian interlocutors, we must take the incoming Trump administration and the Republican Party – which controls the trifecta of ruling institutions after the November 5 elections – at their word. And this time around, their rhetoric suggests they will reduce or remove sanctions on Russia. In remarks on September 5, then-candidate Trump, in response to a question at a forum, indicated he’d remove sanctions as a tool (although he has also separately vowed immediate new sanctions on Iran upon taking office). Additionally, to the extent the first Trump administration’s approach to Russia was a continuation of legacy Washington-consensus bipartisan foreign policy, this can largely be chalked up to the presence in his administration of many establishment figures. Such figures are long gone from Trump’s inner circle, and likely members of his incoming administration are far more driven by personal loyalty to Trump. They are also far more aggressive in terms of anti-Ukraine rhetoric. For instance, Vice President-elect Vance has infamously said he “doesn’t care” about the country and made a series of demonstrably false claims about corruption and mismanagement of US aid. Current picks for defense and national intelligence have made both critical and false statements about Ukraine’s war effort.

To be fair, there is some reason to believe Trump’s approach to Russia may end up being more hawkish than expected, but ultimately, it is too soon to be sure of any aspect of the incoming administration’s policy on Ukraine – including whether they’ll even seek to ensure America meets its basic obligations under the Budapest Memorandum. Ukrainians and their allies have a right to be worried. In practice, the executive branch establishes who is sanctioned and sets the tone for enforcement (a “critical but under-resourced” tool under the current administration, according to one recent assessment). Therefore, the incoming administration could transform the sanctions environment without any new legislation. Moves to significantly reduce entities under sanction would create an unprecedented situation for American financial markets. Since the introduction of the Sarbanes-Oxley Act in 2002 in the aftermath of the Enron scandal, US markets have distinguished themselves by being stricter in terms of compliance and liability compared to UK or EU markets (in contrast to real estate, for instance, where the US has long been a magnet for dirty money, as discussed in a previous newsletter). Take one example, Kazakh bank Kaspi.kz. It is a standout in Central Asia and the post-Soviet region as an innovative neobank originally backed, in part, by US investors. It listed first in London but sought to transfer to the New York Stock Exchange this year. This preference reflects the integrity bestowed on companies able to list on US exchanges and backed by the potential criminal liability taken on by company executives when they submit their accounts.

Fighting dirty money

This image of integrity becomes deeply compromised if we begin removing entities from the sanctions list, either individually (unless a legal process has determined the sanctions designation was in error) or en masse. For instance, most currently sanctioned Russian ‘oligarchs’ – we won’t name names because of the legal tactics used by these businessmen against anyone who calls them out – have a demonstrated track record of money laundering. Moreover, in many cases, companies that are linked to the Russian military production complex have broken the law, through money laundering or fraud, to get around US sanctions and trade restrictions in the first place. Therefore, suddenly removing sanctions designations from these entities and potentially giving them access to US equity and debt markets would significantly degrade the credibility of our markets, undoing decades of regulatory work.

But there is a potential civil society response to any weakening of the federal sanctions regime that protects both Ukraine (meeting our Budapest obligations) and our market integrity: leveraging the power of the states to regulate their economies. We believe that New York State, in particular, can make full use of its existing, robust anti-money laundering (AML) provisions, its Enterprise Corruption statutes, its vital banking licenses – which are required by almost all global financial participants – and its central role in the global financial system. Specifically, we propose that the Attorney General of New York State announce the intention to use this system to replicate and backstop the existing federal sanctions system. It can then add teeth to this designation by launching its own investigations, and, if violations are found, prosecutions. This would send a critical message to US financial markets that New York State will stand up for their integrity and to companies in Russia (and Iran and elsewhere) that our markets remain closed to dirty money. Other state governments could then follow suit.

We do not advocate for this policy lightly and acknowledge we are wading into constitutionally uncertain waters, as this important study of sanctions policies by US states and municipalities from 2012 attests. However, it’s imperative to act: a removal of sanctions will not only imperil Ukraine, but will potentially open up our markets to a tide of illicit investment and destroy decades of work aimed at making our equity and debt markets the most efficient and transparent in the world. States can’t force the federal government to live up to its basic obligations, undertaken in 1994 and reiterated in other contexts from the United Nations to bilateral agreements, to protect Ukraine’s territorial integrity. They can, however, protect US financial institutions while depriving Russia of much-needed revenues in the process. New York’s historically central role in global markets makes it an appropriate venue for this. As America’s commercial capital and a nexus of the global financial system it has the right and the duty to protect our markets from dirty money — and by doing so, help Ukraine stay in the fight.